MANAGING UNKNOWNS
STUART THEOBALD: Rising passive investment can only increase chances of more Steinhoffs
The toxic political atmosphere in which the Steinhoff disaster has unfolded has caused some people to lose their minds. It’s almost as though accounting frauds are not an inherent part of investing, and company collapses never happen. People seem to have forgotten basic portfolio theory — that investing is about managing unknowns. On average, equity investments provide a better return than lending money to companies. This has to be true or else we’d never do it. Equity finance provides a shock absorber for the overall financial system as the varying performance of companies can be absorbed by investors. Like our pension funds, equity investors consciously take on this risk. The company they are backing might be a dog, but the averages make it worth it.An average accommodates a wide distribution. One company can collapse into worthlessness, while another can multiply its value tenfold. It is hard to tell the difference between the two in advance. Some factors are unpredictable and be...
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